© Copyright 2006 Rogers Publishing Ltd. The following article first appeared in the October 2005 edition of BENEFITS CANADA magazine.
Pension Planning: Savings by default
With the recent release of regulations governing DB and DC plans, it’s important to remember those not covered under registered pension plans.
By Glorianne Stromberg

CONCERNS ABOUT THE ADEQUACY OF PENSION PLAN funding to meet obligations to plan members have dominated the thinking about pension plans for several years.

Pension regulators—the Office of the Superintendent of Financial Institutions and the Financial Services Commission of Ontario—as well as trade associations like the Association of Canadian Pension Fund Management, the Canadian Institute of Actuaries and the Canadian Institute at Chartered Accountants, have recently issued consultation papers or proposals respecting regulatory reform. These papers address well-recognized problems with defined benefit plans. It is an open question whether the proposals will find acceptance with the various stakeholders and whether they will address these problems.

There is also concern about the adequacy of defined contribution plans to provide plan members with sufficient pension benefits in retirement. Regulators have issued guidelines to which capital accumulation plans are expected to adhere as well as principles for plan governance. But there also are concerns about their application and adequacy.

What is missing in both cases is the recognition of the need to pro-actively encourage all employers to establish and maintain well-designed, cost-effective savings plans to fund a realistic portion of the retirement needs of their employees. It’s all well and good to address problems with existing plans but we also have to address the needs of those who do not have plans. Promoting workplace savings plans is a good place to start—particularly as workplace pensions are assumed to be the second leg of the three-legged stool on which the Canadian retirement system is based.

Perhaps workplace pension plans should be made mandatory. If so, it’s time to look at how they can be simplified to remove the burden of these plans on employers and to maximize the benefits for plan members. If they are not made mandatory, it is time to look at more aggressive incentives to encourage individual Canadians to establish personal retirement savings plans designed to fund a realistic portion of their retirement needs.

This may require a sea change in the thinking of government and labour policymakers who tend to bring entrenched prejudices to the issue. The former sees the issue as a reduction in tax revenue whereas the latter sees it as benefiting the rich. Both are missing the forest for the trees; it’s a core societal issue that must be addressed to ensure a reasonable quality of life for Canadians in retirement. We can learn from initiatives of other countries and hopefully avoid their mistakes.

Meanwhile. it is important that our schools, workplaces, governments and regulators highlight the importance of individuals supplementing their retirement income through savings, and increasing their knowledge and awareness of how to do so.

Encouraging participation in workplace pension and savings plans is a start. An easy way for plan sponsors to do this is to adopt an automaticenrollment system in their plans, with a conservative, low-cost “default” investment option plus a provision(where appropriate)for rebalancing and increasing contributions.

With automatic enrollment, employees would have to opt out. The findings of behavioural finance indicate that the simple act of making pension plan savings the default option greatly increases participation in pension savings plans while still offering the ability to opt out. Similarly, behavioural finance findings indicate that paying attention to how choices about investment options are presented and offering better designed low-cost default options for investments are likely to enhance people’s savings for retirement.

These minimal changes in plan design will pay off in the long run for both plan sponsors and plan members. Addressing them is a matter of simple prudence.

Glorianne Stromberg is the author of three reports on regulatory strategies, a securities lawyer and a former commissioner of the Ontario Securities Commission. gstromberg@sympatico.ca.